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Crypto lender Celsius in Chapter 11 deep freeze

$1.2b deficit? Yup, that oughta do it

Cryptocurrency lender Celsius Network filed for bankruptcy on Wednesday, a month after it froze all transactions, which prevented netizens from withdrawing funds.

In its prime, Celsius pitched annual yields of up to 18 percent for those storing cryptocurrencies on its platform, lending those assets to hedge funds, exchangers, and traders, and earning interest from those loans to return to its customers. People could borrow and buy digital assets from the platform, too. 

A sudden drop in temperature in the cryptocurrency market following the collapse of a stablecoin, a lack of confidence in the digital money, and broader economic instability left Celsius and its customers out in the cold. Without warning, the company suspended all purchases, withdrawals, or swaps on its platform, leaving customers unable to retrieve assets.

Now the upstart has filed for voluntary Chapter 11 status filed [PDF] with the Bankruptcy Court for the Southern District of New York. 

Documents show Celsius owes hundreds of millions of dollars to various creditors, including an outstanding $81 million to Pharos USD Fund SP, an entity with ties to Sam Bankman-Fried, cryptocurrency billionaire and owner of FTX and Alameda Research, a cryptocurrency exchange and trading firm, according to Bloomberg. 

"[The] filing follows the difficult but necessary decision by Celsius last month to pause withdrawals, swaps, and transfers on its platform to stabilize its business and protect its customers," Celsius' Special Committee of the Board of Directors said in a statement. "Without a pause, the acceleration of withdrawals would have allowed certain customers—those who were first to act—to be paid in full while leaving others behind to wait for Celsius to harvest value from illiquid or longer-term asset deployment activities before they receive a recovery."

A separate disclosure [PDF] revealed Celsius has, right now, a $1.19 billion deficit on its balance sheet: it's holding $4.3 billion in assets, and $5.5 billion in liabilities.

“The amount of digital assets on the company’s platform grew faster than the company was prepared to deploy,” CEO Alex Mashinsky wrote in that filing. "As a result, the company made what, in hindsight, proved to be certain poor asset deployment decisions."

The company made what, in hindsight, proved to be certain poor asset deployment decisions

That said, he did throw the following shade: "The onset of the 'crypto winter' combined with the well-publicized collapse of Luna and the failure of several crypto funds/exchanges led to growing industry-wide reluctance to do business with companies, such as Celsius, that held crypto assets.

"This reluctance was exacerbated by a series of negative media and social media comments about Celsius, a number of which were unsupported and misleading. As a result of all of these factors, users began withdrawing crypto from Celsius’ platform in large amounts and at a rapid pace."

As a side note, the CEO's filing mentions the biz took out a collateralized loans to help fund its operations. According to the chief exec, in July 2021, "when Celsius attempted to repay one of its loans, it was informed for the first time that the lender was unable to return the company’s collateral on a timely basis, resulting in Celsius having an approximately $509 million uncollateralized claim against this party." The private lender has been paying this back at about $5 million a month.

Celsius reportedly has $167 million in cash on hand. It will not be issuing any new loans and confirmed transactions between accounts, including withdrawals, swaps, and transfers, will remain suspended. Interest earnings for those who had their funds stored and frozen on the platform will stop accruing. 

"Celsius initiated a financial restructuring to stabilize the business and maximize value for all stakeholders. Acting in the best interest of our stakeholders, including our entire customer community, is our top priority," it said in a blog post. "As part of the process, we intend to put forward a plan that restores activity across the platform, returns value to customers, and provides choices."

Six US states have launched an investigation into the company's business practices after it prevented customers from withdrawing funds. Vermont's Department of Financial Regulation said Celsius was operating without any regulatory oversight, and appears to have been selling unregistered securities and did not have a money transmitter license.

"The Department believes Celsius is deeply insolvent and lacks the assets and liquidity to honor its obligations to account holders and other creditors. Celsius deployed customer assets in a variety of risky and illiquid investments, trading, and lending activities," it said in a statement.

"Celsius compounded these risks by using customer assets as collateral for additional borrowing to pursue leveraged investment strategies. Additionally, some of the assets held by Celsius are illiquid, meaning they may be difficult to sell, and a sale may result in financial losses. The company's assets and investments are probably inadequate to cover its outstanding obligations/"

Similar cryptocurrency lending platforms, such as Voyager, have also paused transactions and filed for bankruptcy.

The Register has reached out to Celsius for comment. We will update accordingly. ®

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